General Electric powers downwards

“WE COULD USE a lot more ‘out’ and a good bit less ‘up’ around here.” So declared Larry Culp, the new boss of General Electric (GE), on October 30th as he discussed the firm’s third-quarter results. He took over at the troubled American conglomerate on October 1st and is already sure that it needs to focus more on customers and rivals “and, frankly, less on corporate”, ie, the head office.

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When Mr Culp replaced John Flannery, a GE insider who had held the top job for barely a year, investors cheered. GE’s shares had plunged of late even as other industrial shares rose. Initially, the appointment of Mr Culp, an outsider who had successfully led Danaher (a smaller industrial conglomerate), boosted GE’s share price. But the Culp bump subsided as investors started worrying that even Mr Fixit may not be able to fix what ails GE.

His predecessors, Jeffrey Immelt, chief executive for 16 years until August 2017, and Jack Welch, who ran the firm between 1981 and 2001, have left a ghastly mess, as the latest results attest. GE missed revenue and profit forecasts, posting a loss of $22.8bn in the third quarter. The firm recently wrote down $22bn in goodwill at its power division, which makes turbines, as the result of hubristic and mistimed acquisitions made by Mr Immelt. Revenues fell by a third and orders fell by 18% at the power division in the quarter, with little prospect of an upturn. The firm is staying afloat thanks largely to its vibrant aerospace arm and its strong health-care division.

This week Mr Culp took aim at the unwieldy structure of the power division, which has bosses in Atlanta, in upstate New York and also at GE’s corporate headquarters near Boston. The division is to be split in two, with one part containing its gas products and services businesses and the other part bundling together energy offerings ranging from nuclear and steam to “grid solutions” and power-conversion kit. Both will report directly to Mr Culp.

He also slashed GE’s dividend, even though many small shareholders and funds rely on it. The firm has paid out over $150bn in dividends since 2000, but its performance can no longer sustain such largesse. Mr Culp cut it from 12 cents per quarter to just a penny, saving nearly $4bn.

That sounds substantial but Stephen Tusa of J.P. Morgan, an investment bank, insists it is not a silver bullet. The sum is small considering GE’s financial problems. GE Capital (GEC), the financing arm that was rapidly expanded by Mr Welch, this year took a $6.2bn charge to cover shortfalls in its reinsurance business. The firm said this week that an additional $3bn it had planned to inject into GEC may have to increase. Other liabilities may surface at the unit. Steven Winoker of UBS, an investment bank, has examined various wind-down scenarios and concludes: “Our base case implies negative value” for GEC.

GE also revealed this week that American regulators are asking tougher questions about its accounting practices. It was already being scrutinised by the Securities and Exchange Commission (SEC), America’s main stockmarket regulator, for the $6.2bn charge it took this year, as well for other big charges. Now the SEC is expanding its civil investigation to look into the $22bn goodwill charge. GE disclosed this week that America’s Department of Justice is also investigating its accounting practices, raising the spectre of possible criminal charges. As Mr Tusa puts it, “there is still much information to come and wood to chop for the new CEO.”